Over the past 20 years, the amount of outstanding student loan debt has grown to what some have dubbed a “$1.5 Trillion dollar crisis”. Couple that growing statistic with the fact that “one-in-three American labor force participants are millennials, making them the largest generation in the U.S. labor force”. As an unsurprising result, managing student loan debt has become an increasingly significant concern for many employees and employers. This includes not only employees who are entering the workforce for the first time, but also older workers who may have gone back to school during the recession and took out debt of their own, or who may have taken on that financial obligation for their children.
In August 2018, the IRS issued a PRIVATE ruling letter (I am highlighting Private for a reason!) for Abbott Laboratories, who, in my opinion, might have just created a national model for being sensitive to the financial demands of today without jeopardizing their financial future. In short, Abbott designed a program that allows workers who direct a certain amount of their paycheck toward student loan repayments to still get an employer contribution in their 401k retirement accounts, even if the workers don’t contribute to their 401k themselves. This allows the employees to continue to chip away at their student debt without losing the company match to their 401k and it uses the tax code to everyone’s advantage (Read more about their program design here).
Although the private ruling letter can only be applied by the taxpayer/plan sponsor requesting it, Abbott Laboratories in this case, it is a promising development for employers trying to provide stronger benefits for a workforce increasingly stressed with student loan debt. This ruling is important because many employers have been looking for ways to help their employees manage student loan repayment, but the options available for doing so have been fairly limited. Adoption for companies outside of the Fortune 500 was especially limited because of how student loan programs are currently taxed as taxable income.
There is gaining momentum and pressure to have the IRS issue wider guidance on Abbot's strategy so more organizations can go this route. Thus far, the IRS has declined to comment on whether it was considering issuing broader guidance. This is something to keep a very close eye on especially considering this type of benefit doesn’t generally cost an employer any more than originally planned, because the company expects to match an employee’s 401k contributions anyway. While studies have shown student loan debt doesn’t necessarily impact 401k participation, a recent release from The Center of Retirement Research shows retirement wealth accumulation is affected by having student loans. This is something to think about if your organization is highly invested in a 401k match as a primary differentiator for recruitment and retention, especially amongst recent graduates.
This is a very creative approach, but employers should also take a look at what type of message it might potentially send to employees and your organizational culture. Student loan debt isn’t the only financial stressor people have on a daily basis. Let’s say, for example, Employee A went to a state school and graduated with no debt, while Employee B went to a high-priced, private, out-of-state school and has debt. What if Employee A can’t afford to contribute to their 401k? Why should Employee B get a contribution while Employee A is left out because they have no student loan debt? What about day care? What if Employee C has two kids in child care and is struggling to pay for it? Aren’t they just as deserving of getting extra money as employees with student loan debt? Will this also impact how non-discrimination testing turns out?
A lot of questions would need to be answered through a thorough review before implementation, with a qualified advisor and TPA who truly understand the potential discrimination issues. Even though this was a private ruling letter, it’s going to continue to spur a lot of conversations. And rightfully so, as this is an important issue that isn’t going away anytime soon.